Many investors aren’t content to hire someone to manage their portfolio or to limit their own involvement to picking mutual funds. Perhaps they see investing as a second job, a hobby or a passion. Whatever their motivation they like to roll up their sleeves and do the dirty work it takes to buy individual stocks.
For socially responsible investors there are several good reasons to pick your own stocks. But whether it’s traditional or socially responsible investing you need to be willing to make the commitment that it takes to make your principle grow. Investing isn’t like gardening where you’ll simply kill the plants if you don’t attend to them properly. Rather, you could see your retirement fund or college savings dwindle away.
That said, if you believe in the SRI approach, here are three benefits to selecting your own stocks.
Lower fees. Buying individual stocks rather mutual funds means never having to pay loads or maintenance fees. High expenses in the form of sales loads and operating fees will lower the return on any mutual fund investment. But SRI funds typically carry higher fees than traditional funds because they perform the service of screening stocks for investors.
Traditional index funds have lower fees or expenses because their goal is to simply mirror broad benchmarks such as the S&P 500. SRI index funds attempt to mimic socially screened indexes such as the Domini 400 Social Index. While the fees for SRI index funds might be less than actively managed SRI funds, they might still be more than the low-fees for traditional index funds.
You’ll still pay brokerage fees when buying individual stocks. But using an online brokerage service such as Charles Schwab, Fidelity or ETrade will be less expensive then purchasing through an investment advisor who holds a broker’s license.
Potential for larger gains. Most actively managed mutual funds fail to outperform major market indices, so appreciation potential is greater when owning an individual stock vs. a mutual fund. Additionally, though a single stock that performs spectacularly can lift an entire fund, an investor won’t realize the full benefit of that stock’s price increase because it is typically offset by flat or underperforming stocks within the fund. So many investors choose to select their own individual stocks.
Of course there’s also a flip side to buying an individual stock over a mutual fund – the possibility of a large loss is greater.
Satisfaction from conducting your own research. There’s no question that there’s a greater likelihood of making “rookie” investing mistakes when you go it alone, depending on your level of expertise. To make smart stock selections, individual investors need to become more aware of the particulars of target companies before they risk their money. It can be an arduous and time consuming process. But doing that grunt work is the very activity that gives many socially responsible investors the comfort level they seek when making an investment.
Fortunately access to information has never been easier, because of the Internet and regulations requiring greater disclosure by companies. Corporate web sites serve practically like hard-copy annual reports, providing news on the many good things a company wants investors to know and links to the federally required reports that include some information they’d prefer not to highlight. Investors can find additional financial information and analysis, such insider trading filings and performance comparisons to competitors, on financial and business web sites such as Smartmoney and Morningstar.
Socially responsible investors face a greater challenge finding the information that’s important to them. Through the annual federal 10-k filing a company must disclose if it is engaged in any shareholder actions or law suits. Additionally the records of actions taken against a company by the Environmental Protection Agency or the Occupational Health and Safety Administration can be found online at the web sites of those government agencies.
Investors should also search for any news stories about companies of interest. A general search using Google can produce results, as would a more targeted search using the archives of the major newspaper located closest to the company headquarters.